Long overdue, Canada’s Competition Bureau has launched an investigation of Amazon, looking at potential “abuse of dominance” in the Canadian marketplace.
Amazon, which reported worldwide sales of almost $ 1 billion (U.S.) a day in the second quarter, “owned” the e-commerce space in Canada well before the coronavirus crisis. But its dominance has accelerated further over the past six months.
Sales of its North American segment (it doesn’t report country-specific data) were up 43 per cent in the second quarter of 2020 compared to last year, and subscription services — its popular Amazon Prime program — were up 29 per cent.
This is a staggering pace for a company with a market cap of $ 1.6 trillion, and it makes the watchdog’s investigation all the more important.
The Competition Bureau highlighted three areas of interest for its inquiry. The first two are related to third-party sellers’ who use Amazon’s platform. Specifically, the regulator investigates whether Amazon had policies in place that would assure that third-party sellers aren’t selling their products at a lower price elsewhere, including on their own websites or other online marketplaces.
The second area is an examination of the ability of third-party sellers to succeed on Amazon’s marketplace without using its “Fulfilment by Amazon” service or advertising on Amazon.ca.
These two areas are important and worth investigating, especially given the fact that third-party sales account for 20 per cent of Amazon’s overall revenue. Amazon is not a neutral player on its marketplace. It has allegedly taken advantage of its access to third-party sellers data, by copying the goods they sell and then prioritizing its private-label goods.
In 2019, U.S. Sen. Elizabeth Warren pointed out during her bid for the Democratic nomination that when Amazon (and other big tech companies) own a marketplace and are active participants at the same time, it creates an inherent conflict of interest that undermines competition.
The Competition Bureau needs to come up with recommendations that target this inherent conflict of interest head-on.
The solution for Amazon’s marketplace, may resemble the so-called “Chinese walls” or “Ethical walls” that were introduced in the investment banking industry as part of the Dot-com aftermath. In 2003, 10 of the world’s top investment firms were forced to separate their research and investment banking departments, due to a severe conflict of interest.
The problem was that investment banks were making tons of money from underwriting “hot” companies in initial public offerings (IPOs), while analysts working in research departments in the very same banks were covering the same companies.
It could have been the case that a bank, say Lehman Brothers, was making a positive pitch to sell shares to investors in an IPO, while at the same time, analysts at Lehman would have a “strong sell” rating on the stock. A clear conflict of interest.
As part of the settlement, the banks agreed to pay a $ 1.4 billion fines, to investors who were harmed and to regulatory agencies.
The third area which the Competition Bureau is investigating is more general and considers “any efforts or strategies by Amazon that may influence consumers to purchase products it offers for sale over those offered by competing sellers.”
The first thing to examine here would be Amazon’s pricing strategy. From its first days, Amazon sacrificed profits in the interest of growth. This is reflected in its financial statements — even with unthinkable sales revenue figures, Amazon’s operating margin in its North American segment is only 3.4 per cent. On its International segment margins are consistently negative. Most of the profit it’s making comes from its cloud-computing segment — Amazon Web Services (AWS), and recently, advertising started to contribute to the bottom line as well.
Amazon base prices are low, but when coupled with an additional five-to-15 per cent discount offered as part of its popular “subscribe and save” program, they are unbeatable. Amazon is basically underpricing every other player in Canada.
Low prices and perfect execution create loyal customers. Even Prime Minister Trudeau chose Amazon over Canada Post-owned Purolator to distribute personal protective equipment across the country in April.
What is Amazon trying to achieve?
For Tim Bray, a former vice-president and distinguished engineer with Amazon who resigned in May over the firing of two whistleblowers, the answer is clear. “Amazon’s strategy of growth over profits doesn’t make any sense at all, unless your end goal is to become monopolistic in size to point in which you regain pricing power. The end game is to drive other people out and gain pricing power,” he said in a video call from Vancouver.
Looking at pricing strategies is a necessary first step for the Competition Bureau. But the watchdog must also examine other factors which contribute to it becoming so dominant in our lives. Specifically, the data its collecting on its customers and how it is using it.
“Why should the data from the smart speaker company be combined with the data from the Whole Foods company and the data from the Amazon store front?” adds Bray. “That in itself is another good reason to break the company up.”
Andreas Weigend was the chief scientist at Amazon. His role was to think through the data strategy of the company. “We live in an era of post-privacy,” he said from his home in San Francisco. “Amazon is doing a very good job with the data it’s collecting. The recommendations I get are very useful to me.”
He acknowledges that the data Amazon owns helped it dominate the market. “Absolutely. Absolutely.”
The Canadian regulator must use a wide prism to evaluate Amazon, consistent with what Lina Khan, a professor of law at Columbia University defines as Amazon’s Antitrust Paradox.
In her 2017, paradigm-shift paper, Khan wrote: “we must view Amazon as an integrated entity. Seeking to gauge the firm’s market role by isolating a particular line of business and assessing prices in that segment fails to capture the true shape of the company’s dominance and the ways in which it is able to leverage advantages gained in one sector to boost its business in another.”
The investigation launched by the Competition Bureau is important. But in order for it to be complete, it must examine Amazon as an integrated entity. In addition, it should evaluate how to eliminate conflict of interest in the marketplace, and whether data collection and usage by Amazon is hurting the competition. That is the big picture it shouldn’t miss.